The Federal Deposit Insurance Corporation released information this week indicating that banks in the US had accelerated their investments in structured products in the three months to September. Purchases of structured products in the third quarter increased to USD69 billion, a 45% increase from the purchases of structure products in the same period the year before, the independent financial agency said. FDIC also touted the statistic as the highest level achieved since it released figures in 2009.
As explained in the Financial Times article, the rising amount of purchases of structured products was meant to offset pressure in profit due to ultra-low interest rates. This was seconded by analysts, who said the acquisition od high-yielding products will help offset how low interest rates affect the bank's lending business, which is the latter's bread and butter. FDIC defined structured financial products as a wide range of securities including commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs).
Moreover, banks have been observed scaling back its purchases of US Treasuries by cutting its mandated USD196 billion in US government debt a year ago to USD159 billion.
Raymond James' banking analysts projected that the median yield that is generated by the overall securities portfolios of banks increased 3 basis points, pushing the yield to 2.41% in the third quarter, and essentially providing its profit margins a much-needed boost to around 3.6%.
The Office of the Comptroller of the Currency (OCC) had warned banks about the higher interest rates in the last few years and its potential impacts. OCC supervises the largest lenders in the US, including Bank of America, Citigroup and Goldman Sachs. The regulator in its semiannual report said, "Low-volatility environments encourage investors to ‘chase' yields, often taking more interest rate or credit risk to maximize return."
Earlier this month, the US Federal Reserve said it will be doing a stress test on the largest banks in the US via a simulated sharp rise in interest rates as the central was was concerned about the possibility of a rate risk in the financial system.
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